People want to make sure the risk they take when investing their savings is worth the end reward. Holding onto a volatile investment that ultimately delivers an underwhelming return might not justify the worry for many. That is why it may be useful to examine the investment trust sectors with the highest average Sortino ratios, which is a process that compares a fund’s return with its risk-free rate and downside deviation to ascertain whether the end reward was worth the risk put in.
Unlike the Sharpe ratio, this risk/reward measurement only considers downside volatility, meaning most fluctuations in performance would be on the upside.
But even if an investment does grow savings substantially, some investors may still feel depleted if the route to get there was volatile and filled with prolonged periods where performance was in decline before picking up again.
So, in addition to looking at the sectors with the highest Sortino ratios, we’ll include only ones that delivered positive returns most often, too. By excluding investment trust sectors that were not top-quartile for both of these metrics over the past 10 years, we are left with just three.
IT Technology & Technology Innovation
The sector to deliver the highest average Sortino ratios and positive periods was IT Technology & Technology Innovation. Trusts in this group were up 411.6% on average over the past decade, with an average Sortino ratio of 0.87. To put that into perspective, the average investment company had a Sortino ratio that was five times lower (0.17) than those in this sector.
Investors did not have to suffer many periods of negative returns over the period to get these high returns. Indeed, the average tech trust reported positive returns in 83 of the 120 months over the past 10 years.
Meanwhile, the average investment trust was up in just over half (62 months) of the past decade. From this perspective, most IT Technology & Technology Innovation trusts added almost two years’ worth of positive returns to investors’ portfolios.
Of the trusts in this sector, the one that beat all other investment companies on Sortino and positive periods to make the greatest return was Allianz Technology. This £1.4bn portfolio is up a considerable 634.4% over the 10-year time frame, increasing the value of investors’ capital more than six-fold.
The trust was managed by Walter Price for most of the period before he retired. He handed the reins to current manager Mike Seidenberg in 2022. Under Seidenberg’s leadership, the portfolio has adopted some highly concentrated positions in 42 stocks in the hopes of capturing upside growth from leading tech companies. Its top five holdings alone – Nvidia, Microsoft, Meta, Apple and Broadcom – account for a third (33.4%) of the whole portfolio.
Trailing behind Allianz Technology is Polar Capital Technology, although its 560.6% return over the past decade still beats most investment trusts. Its Sortino ratio of 0.91 over the period is marginally higher than Allianz Technology’s 0.89, and it had only one fewer month of positive returns (74), so the differences are minor in that regard.
IT Global
One of the few other sectors to meet all the requirements is IT Global. Trusts in this sector are up 144.5% over the past decade, with an average Sortino ratio of 0.45. This may seem relatively small compared with the IT Technology & Technology Innovation sector but they remain ahead of the majority of investment trusts.
Indeed, trusts within the IT Global sector also gave investors over a year’s worth (13 months) of positive returns compared with the average investment company, reporting gains in 76 months over the past decade.
Scottish Mortgage is the highest-returning trust in the sector to deliver a top-quartile Sortino ratio and positive periods. It soared 373.1% over the past 10 years, beating its peer group by a substantial 228.6 percentage points.
Shareholders saw the value of their savings grow in more months than any other trust in the sector, or the IT Technology & Technology Innovation for that matter. Returns have been in the black for 79 months of the past 10 years, with the trust amassing a Sortino ratio of 0.56 during that time.
Most of its negative performance occurred in the past three years, when the £11.9bn trust was down by 32.2%. Its share price fell substantially from its 10-year peak of 733.4%, but researchers at RSMR explain that the risk is well worth the reward for investors who have a long-term time horizon.
“The trust’s ability to exercise patience, its long-term approach and engagement with the companies in which it invests have all come together, and its performance reflects all these aspects,” they say. “Its ability to invest in private markets has given the trust a distinct advantage as companies stayed private for longer. The experience of operating in private markets over numerous years has meant access to early-stage companies who see Baillie Gifford as a patient investor.”
So while near-term drawdowns have detracted from its long-term performance, Scottish Mortgage shareholders have seen their savings mostly increase over the past decade and have been ultimately rewarded with a total return much higher than for the majority of investment trusts.
IT Europe
The only other sector that has delivered top-quartile returns, Sortino ratios and positive periods is IT Europe. Trusts in the sector are up 130.1% on average over the past decade, delivering positive returns in 76 of the past 120 months. Between them, the trusts in this sector have an average Sortino ratio of 0.33 for the time period.
The best performer to meet all the requirements is Fidelity European, up 225% over the past decade, flying 94.9 percentage points ahead of the average IT Europe trust.
“The trust provides long-term investors with an attractive exposure to the region, though the strategy may underperform during periods of strong equity market returns when riskier stocks are in favour,” explain the trust managers.
“However, we think it is likely to outperform in weaker, more volatile environments, and so this should improve its risk-reward characteristics over time.”
This article first appeared in the June issue of Portfolio Adviser magazine
